Fannie Mae (FNMA) & Freddie Mac (FMCC): Juxtaposition Of Reality, Fraud, & A Great Big Beautiful Tomorrow – Guest post – the author of this article may have a long position in the companies
- Ben Carson Finds $500 Billion Missing At HUD, & States Money Stolen From Fannie Mae (FNMA) & Freddie Mac (FMCC) To Fund Obamacare
- Treasury Secretary Mnuchin States GSE Money Stolen
- FHFA Is Organized Like CFPB
- What To Do About It?
After reading the news stories about Obama’s FISA memo, and intrusion into the American way of life, you would think things couldn’t get any worse. Now, information is coming out that President Barack Obama stole the entire profits of two privately owned, and publicly traded companies. The theft left the shareholders of Fannie Mae (FNMA) and Freddie Mac (FMCC) common and preferred stock decimated, and holding onto equity placed into limbo. Fannie Mae (FNMA) and Freddie Mac (FMCC) are collectively referred to as Government Sponsored Enterprise(s) (GSEs). One might think that that name implies that the government owns the GSEs, as some journalists inaccurately write, however, in fact, it means that in the past, the federal government, by each GSE’s charter, have sponsored Fannie Mae (FNMA) and Freddie Mac (FMCC) in a limited role only has an implicit backup of capital, if needed.
Public Told GSEs Were Stable
In 2008, the year of the US financial crisis that saw the failure of IndyMac Bank and the takeover of investment bank Bear Stearns by JP Morgan Chase, Ben Bernanke who was the Federal Reserve chairman at that time, briefed the House Financial Services Committee that Fannie Mae and Freddie Mac are adequately capitalized. Per James Lockhart, ”Both of these companies are adequately capitalized, which is our highest criteria," Lockhart said in an interview with CNBC. "They have been very active in the mortgage market, and they are continuing to be. And, in fact, Congress has put on them the requirement to do jumbo mortgages and they have been doing those as well."
Public Told Why GSEs Were Put Into Conservatorship
To understand the justification for FHFAs actions to place the GSEs into Conservatorship, an understanding of three non-cash expenses is necessary:
- Deferred Tax Assets: created due to taxes paid or carried forward on the balance sheet but not yet recognized on the income statement due to a tax authority recognizing revenue. Deferred tax assets will only be recognized when there is an expectation of future profit
- Loan Loss Reserves: an expense set aside as an allowance for bad loans or an assumption of reduction in near term fair value as an asset. For Fannie Mae, a loan loss reserve would be the expected total losses over its entire 30 year portfolio or an estimate of 30 years of expected losses, and
- Valuation Losses: an estimated adjustment for current market value independent of intention to liquidate.
Congress passed the Housing and Economic Recovery Act of 2008 (HERA) on July 30, 2008; authorizing the newly created independent Federal Housing Finance Administration (FHFA) to absorb the powers and regulatory authority of both entities, placing the GSEs into a ‘Temporary’ conservatorship; a form of control similar to what is found in a bankruptcy process meant to conserve and preserve their assets. The FHFA director at the time, James Lockhart, transmitted a "Notice Of Establishment," for publication in the Federal Register on September 4, 2008. The notice formally announced the agency's existence and authority to act.
Turning back to December 2007, Fannie Mae (FNMA) disclosed $45.5 Billion in core capital, exceeding regulatory requirements. Q1 of 2008 takes Net Loss per the 10Q and adds back adjustments for non-cash expenses. The net loss of $2.2 Billion is misleading as Fannie Mae took a non-cash loan loss expense of $2.7 Billion. Fannie Mae generated $.5 Billion in cash adjusted for non-cash items. Q2 2008, during the media frenzy of the financial crisis, Fannie reported a net loss of $2.3 Billion. A non-cash loan loss reserve of $5.5 Billion needs to be added back. After this adjustment, Fannie Mae showed a cash net income of $3.2 Billion.
On September 7, 2008, FHFA put the GSEs into Conservatorship. In Q3 2008, the first quarter, of which the GSEs are under FHFA control, the loan loss was $8.7 Billion as FHFA forces Fannie Mae to write off $21.4 Billion of Deferred Tax Assets (DTA). If you take $29 Billion of net loss, and deduct non-cash expenses of $21.4 Billion, and $8.7 Billion Fannie Mae had cash net income of $1.1 Billion. Fannie Mae disclosed $36.3 Billion of cash in bank on September 30, 2008.
To summarize 2008, although Fannie Mae enjoyed 80 years of profitability, after just 23 days acting as conservator, FHFA forced Fannie Mae to write off $21.4 Billion of DTAs, as if the GSEs would never return to profitability, therefore the tax benefit will not be realized. Similar accounting was made for Freddie Mac.
FHFA struck a fraudulant deal with the Department of Treasury (UST) with a Preferred Stock Purchase Agreement (PSPA), to send to each GSE $100 Billion, even though it was not needed, in exchange for 1 Billion shares of senior preferred stock, with a 10% annual dividend paid quarterly to the UST, plus warrants to purchases 79.9 percent of common stock for a thousandth of a penny per share. Banks receiving UST aid at the time were given 5% dividend rates. The ‘loans’ to GSEs significantly increased in the following years as the quarterly dividend payment to UST was larger than their revenue. Warrants issued illegally at 20000% less than the market price at the time of issuance, an almost free price, are illegal per Securities and Exchange Commission (SEC).
Enter The Hedge Funds
In 2010, then acting FHFA Director Edward DeMarco, ordered the GSEs to no longer trade their shares (formerly listed tickers were FNM and FRE) on the New York Stock Exchange. DeMarco claimed, "A voluntary delisting at this time simply makes sense and fits with the goal of a conservatorship to preserve and conserve assets,". The common and preferred stocks of Fannie Mae and Freddie Mac plummeted on the news, and delisting. Later in 2010 and 2011, hedge fund mangers like Kyle Bass of Hayman Capital accumulated the junior preferred shares for pennies on the dollar; yet, later claimed to of sold them off due to gridlock in Washington. Also at the time, other hedge funds including Perry, Fairholme funds, Bill Ackman, and retail investors accumulated the junior preferred and common stocks, in anticipation of a return to profitability. Yet, little did they know, hopes of a return on their investment would be decimated by what historians may one day refer to as one of the most Draconian governmental takings of private property in US history.
Net Worth Sweep
In August 2012, the Obama administration did something never before done in U.S. history. In an administrative action that makes the 1800’s U.S. government confiscation of American Indian territory look like a minor action, and when it was clear, court documents will show later, that it was evident that the GSEs, whose profits make up 20% of the US gross domestic profit (GDP), paid back $270 Billion of shareholder profits on the $188 Billion “loans”, and they could no longer be considered in financial distress, the Obama administration ordered that all profits generated by Fannie Mae and Freddie Mac be sent to the UST, in what is labeled the 3rd amendment to the PSPA as the Net Worth Sweep.
Multiple lawsuits were filed by investor hedge funds and individuals suing the government over the UST policy of what they perceive as the confiscation of their share of the GSE profits going to the government as illegal. Retiring Judge Lamberth of the U.S. district court said the government had the authority under a 2008 law that laid the ground for its seizure of the two companies.
Ghost Kill Bills & Meddling Stooges
In 2013, U.S. senators Bob Corker of Tennessee and Mark Warner of Virginia introduced the Housing Finance Reform and Taxpayer Protection Act bill that gets rid of Fannie Mae and Freddie Mac and replaces them with Federal Mortgage Insurance Corporation (FMIC); this bill failed to pass congress. Later in 2014, a new ‘Ghost Kill Bill’ appeared sponsored by Senators Crapo and Johnson. centerpiece of the Johnson–Crapo legislation is the Federal Mortgage Insurance Corporation (FMIC), a new government entity that serves several purposes. First, the FMIC acts as a new federal regulator of the mortgage industry, designed to monitor the safety and soundness of various financial institutions. The current regulator of the GSEs, the Federal Housing Finance Agency, would become an independent agency within the FMIC. This bill was also later shot down, namely for it’s unrealistic 10% first-loss provision, and abolishment of the GSEs.
During the Conservatorship, shareholders have also been terrorized by, so called ‘Fellow Travelers’, that promoted in Washington replacements to the GSEs, including wiping out shareholders. These travelers included Jim Parrott, David Stevens, Peter J. Wallison, Gene Sperling, Barry Zigas, Edward J. Pinto, Michael Stegman, and Alex J. Pollock.
United Investors Activism
Tim Pagliara Founder, Investors Unite Chairman, Founder and CEO of CapWealth Advisors LLC Tim formed Capital Trust Wealth Management in Franklin, Tennessee, organized a coalition of private investors across the U.S. from all walks of life to meet with Congress April 2014 and January 2015 to advocate housing finance reform that respects shareholder rights. Mr. Pagliara led a group of retail investors on at least two occasions to Washington in efforts to lobby against the ghost GSE kill bills in 2014 and early 2015.
FHFA filed suit for $250 Billion against 18 financial institutions on behalf of Fannie Mae (FNMA) and Freddie Mac (FMCC) for misrepresenting private label securities (PLS) they sold to the GSEs alleging violations of federal securities and common law. FHFA settled on the lawsuits for significantly less, and instead of sending the settlement money to the GSEs they sent the money to UST. Still, the $250 Billion represents money owed to the GSEs as it is the property of their shareholders and that amount needs to be returned to them, irregardless of the amount for which FHFA settled.
- General Electric Company $6.25 Million
- CitiGroup Inc. $250 Million
- 3. UBS Americas, Inc. (Union Bank of Switzerland) $885 Million
- J.P. Morgan Chase & Co. $4 Billion
- Deutsche Bank AG $1.925 Billion
- Ally Financial, Inc. $475 Million
- Morgan Stanley $1.25 Billion
- SG Americas (Societe Generale) $122 Million
- Credit Suisse Holdings (USA) Inc. $885 Million
- Bank of America Corp.
- Merrill Lynch & Co.
- Countrywide Financial Corporation $5.83 Billion)
- Barclays Bank PLC $280 Million
- First Horizon National Corp. $110 Million
- RBS Securities, Inc. (in Ally action) $99.5 Million
- Goldman Sachs & Co. $1.2 Billion
- HSBC North America Holdings, Inc. (Hong Kong Shanghai Banking Corp.) $550 Million
- Non-Litigation PLS Settlements Wells Fargo Bank, N.A. $335.23 Million
Carson Discovers $500 Billion In Accounting Errors At HUD
So far, we’ve seen $270 Billion of GSE money was sent to the US Treasury, and another $250 Billion of bank settlement money that belongs to GSE shareholders, that’s $520 Billion dollars.
The OIG is the enforcement arm of HUD and has been led by Inspector General David Montoya since 2011. Their revised audit report issued on 1 March 2017 deals with “pervasive material errors” found in HUD’s 2015 and 2016 consolidated financial statements. The total amounts of errors corrected in HUD’s notes and consolidated financial statements were $516.4 Billion and $3.4 Billion, respectively. OIG audits of HUDs accounting continues.
Mnuchin Confirms GSE Sweep Money Used to Fund Obamacare
In an interview by Fox Business News in May 2017, U.S. Treasury Secretary Steven Mnuchin confirmed stunning reports that officials from the last Administration used the windfall from the Net Worth Sweep of Fannie Mae and Freddie Mac’s profits for “other parts of the government.”
FHFA Organizational Structure Similar to Consumer Financial Protection Bureau (CFPB)
In October of 2016 a three-judge panel in the federal appeals court ruled that the structure of CFPB was unconstitutional because it gives its sole director too much power. The panel sought to remedy the problem by giving the president power to fire the director to make the position similar to the Attorney General and other agency heads who answer to the White House.
FHFA structure is similar as CFPB. In short, the directors of FHFA have had the lack of restrictions to oversee the GSEs in the manner they chose without concerns of being fired. No reorganizational restructure has been announced yet.
Then in January 2018, the D.C. Court of Appeals reheard the case en banc, ie the entire court hears the case, it upheld the constitutionality of CFPB structure but decided that CFPB Director Richard Cordray far exceeded his authority to act as director.
The same could potentially be said of FHFA Director Edward DeMarco when he enacted the 3rd amendment of the PSPA, the so-called Net Worth Sweep. The FHFA conservatorship of the GSEs has resulted in the GSEs paying $271 billion to the TSY on a $188 billion loan.
Berkowitz on Fannie Mae and Freddie Mac
Bruce Berkowitz of Fairholme Funds states that reform of Fannie Mae and Freddie Mac is coming based on their ability to generate hundreds of billions in profits and their ability to serve the public and survive. FHFA emphasized that Fannie Mae and Freddie Mac should exit conservatorship as public utilities with regulated rates of return. TSY communicates that 2018 is the year to fix Fannie Mae and Freddie Mac in a manner that makes sure tax payers are never put to risk. Berkowitz expects further gains from any Trump Administration-led initiative.
After almost a decade of conservatorship, the government released thousands of documents demonstrating that the Obama Administration knew the GSEs were on the verge of sustained profitability and instead of releasing them from conservatorship instead fraudulently siphoned shareholder owned cash from the GSEs via the Net Worth Sweep.
A Great Big Beautiful Tomorrow
Shareholders of Fannie Mae and Freddie Mac have been horribly treated, enduring harsh daily abuse from policy makers, special interest groups, the media, and from the market. Abuse ranging claims to kill shareholders, and threats of Receivership, yet, in spite of abose and even the Net Worth Sweep, the companies, and shareholders are never going away. More than 9 years after the beginning of the conservatorship and failures of congress to enact any housing finance regulation, the UST writes to FHFA on agreed 4th modification of the preferred stock purchase plan (PSPA). Fannie Mae and Freddie Mac each will maintain a capital buffer of $3 billion. Buried deep in the letter, and limited to one crucial sentence, it states that the Treasury, as holder of outstanding shares of Senior Preferred Stock of the Enterprise, shall be entitled to receive, when, as, and if declared by the Board of Directors, in its sole discretion, cumulative cash dividends”. This does not say that FHFA will make the decision on whether or not the Enterprises (GSEs), rather their Board of Directors. Let that sink in.
That same day, FHFA stated that it considers the $3 billion capital reserve to be sufficient to cover fluctuations in the Enterprise’s business and that going forward dividends will be paid on amounts above the $3 billion in capital reserve in the absence of exigent circumstances. Some members of Congress are not current that GSEs have paid back $270 billion on a $188 billion loan they did not need. For instance, Congressman French Hill of Arkansas, who announces that the latest agreement between FHFA and UST deprives taxpayers of the compensation to which they are entitled. Such comments are going unheard because congress has failed to enact any housing finance regulation and it appears that FHFA and TSY together will make any amendments necessary.
January 2018 FHFA released it’s Strategic plan through 2022 with these goals:
- Ensure Safe and Sound Regulated Entities
- Ensure Liquidity, Stability and Access in Housing Finance
- Manage the Enterprises’ Ongoing Conservatorships
January 2018 Treasury Secretary Mnuchin Testified at Senate Banking Committee that there are several administrative options to take with the GSEs that will sustain a liquid capital market.
Turning now to the equity of Fannie Mae (FNMA) and Freddie Mac (FMCC); the longterm charts show that there is great opportunity. In fact, there has been massive accumulation of the equity since the announcement of Trump’s victory of the presidency over Clinton. It is evident that strong buying will occur on announcement of administrative action. There has also been accumulation by mutual funds, including Growth Fund Of America 529 Plan, that currenly holds about 67 Million shares of Fannie Mae (FNMA) and 68 Million shares of Freddie Mac (FMCC).
As of February 2, 2018, a partially updated balance sheet for Fannie Mae on Finance.Yahoo.com shows $104.5 billion in cash and cash equivalents and has 1.2 billion common shares outstanding. Freddie Mac shows $175 billion for the same period and has 650 million shares outstanding.
There have been a number of possible outcomes for how to handle the preferred and common equity, however, in light of all that has taken place over the years; and the hardship all investors have been through, the only sensible solution is simply to just give back the all the money taken (or borrowed), and fully restore the rights of all shareholders.
Full restitution is the only way to fix the situtation, and there is no other way around it. It’s simple, it might be temporily inconvient for the government, but, it simply makes sense.
Our founding fathers had great vision and understanding of far reaching civil matters that our nation was built upon. The Constitution still holds true today, and even will shine through here.
Trump administration is here for the people, and we trust he will capitalize Fannie Mae and Freddie Mac by returning the stolen capital. After all, and as Mr.Capiano wrote, "Not returning discovered stolen assets would be usury" Thankfully our new administration believes in the rule of law. The last thing our admin would want is further lawsuits. The swamp charades are not working anymore. “We the people" can see through the lies, false flags and smoke screens. Political elites should lead by example, and hold swamp criminals accountable to law.
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Your Starting Point for GSE News, Resources, and Information
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Mnuchin Confirms GSE Sweep May have Funded Obamacare
Perry Capital Appeals Judge Lamberth’s Dismissal of GSE Lawsuit
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A Forensic Look at the Fannie Mae (FNMA) Bailout: Scrubbing the Tricky Accounting of Conservatorshiphttps://www.housingwire.com/ext/resources/images/A-Forensic-Look-at-the-Fannie-Mae-Bailout-Parts-I-II-III-FINAL-20150616.pdf
U.S. Court Rules CFPB Organization Unconstitutional
Court of Appeals rules against CFPB, vacates PHH’s $100M fine for alleged RESPA violations
Berkowitz on Fannie Mae and Freddie Mac
Mnuchin Letter to Watt December 21, 2017
FHFA Strategic Plan
FHFA Statement on Capital Reserve December 21, 2017
French Hill of Arkansas Responds to Dividend Payment Changes
Treasury Secretary Mnuchin Testifies at Senate Banking Committee
Fannie Mae Balance Sheet as Seen on February 2, 2018
Freddie Mac Balance Sheet as Seen on February 2, 2018
Article by Nikko